The company no longer looks cheap when we look at P/E. Citi analyst Bin Liu compiled a list of Chinese Internet companies that are fast growing and market leaders in their respective fields. Weighted by market cap, the group averages 33.1 times 2013 P/E. Qihoo trades at 57.8x.

But if we look at PEG – P/E versus growth ratio – Qihoo starts to look more reasonable and justifies analysts’ Buy recommendations. Its 2013-2015 PEG is 0.5 versus the peer’s 0.8.

The discrepancy arises because much of Qihoo’s valuation lies within the growth value. Citi expects Qihoo to grow revenue at an annualized 67% from 2013 to 2015. For comparison, the peer group on average is expected to grow at (only) 31%.

Looking at Qihoo via the PEG lens is legitimate. The company owns China’s largest Android app store (30-40% market share) and the nascent mobile gaming industry has been growing fast. Users find mobile games through app stores, which means money for Qihoo. IVAS revenue, mainly derived from online game revenue growth, now contributes to 40% of Qihoo’s total revenue, up from 30% a year ago.

Qihoo’s search engine look rosy too. Instead of making money, the company has been more focused on growing market share (17% right now), aiming to reach 20% by the end of the year. As a result, its search makes a fraction of what competitors get, which means once Qihoo is ready to monetize, there is a big upside. (See table below.)

In an interview with Bloomberg today, Qihoo’s CFO commented on this point. Here is Bloomberg:

Qihoo, which doubled revenue in the second quarter, gets about 1 percent of China’s $7 billion online advertising market while it has 18 percent of search traffic, Chief Financial Officer Alex Xu said in an interview in Beijing today.

“The percentage of revenue share will get closer and closer to the traffic share over time,” Xu said, declining to comment on how long it will take to close the gap. Improved efficiency and an increase in customers will “basically narrow the gap,” he said.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.